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Friday, August 1, 2014

The old expression is: "They don't ring a bell at the top." Well, "they" may not, but in this case, the charts sure did. Enjoy this one, because moves that are telegraphed so well in advance don't come along often.

To recap: We knew to look for a peak near 1990 SPX almost a week before the market got there. Price hit the target area, and then we got confirmation of the reversal via an impulsive first wave off the high. On Monday, we knew to watch for a second wave bounce, which we got. On Wednesday, we knew to watch for a waterfall if SPX broke 1967 -- and then on Thursday, we got the waterfall.

It doesn't get any better than this, so enjoy it while it lasts. Most of the time, the market plays coy and ambiguous.

I am assuming most readers have made good profits recently -- so remember that, when trading, there's a time to expand your capital and there's a time to protect it. Expand it on the high-probability, low risk/reward plays like we just had. Protect it when the entries become high-risk and ambiguous. I'll be frank -- that's a discipline I myself have not entirely mastered, but my own experiences there have taught me a few things I'd like to share.

My biggest strength as a trader, and my biggest weakness, is the exact same trait: I'm ambitious. And I believe it's in the nature of ambitious people to want to "be in the action" constantly, and thus to try to keep expanding indefinitely. But nothing in life works that way. Everything "breathes," in a sense.

Know when it's time to stop expanding, and when it's time rest for a while After a period of expansion, allow yourself time to consolidate and solidify that victory. Don't be like the gambler who wins a huge jackpot, then gives it all right back because he doesn't realize (or accept) that it's time to cash out. Conserve capital and wait patiently for the next expansion point -- which will either be a low-risk entry, or a clear pattern (or both). That moment may come quickly; sometimes expansion follows upon itself almost immediately. But it may not.

The point is that we can't force things; we should try to let the market come to us. When it does, then we should go with the flow -- take what it gives us, and let the waves do their work.

It's in our natures to want more. So we sometimes fight our way into positions that we know are ill-advised -- and then we fight our way out of positions when we know we should just let them ride. But if you can master those two self-defeating tendencies, then your account will grow by leaps and bounds. There will still be reversals of fortune, but they will come less frequently, and the increases will ultimately outweigh the reversals.

I think trading attracts the ambitious, so I have to believe these are almost universal struggles for traders. So your ambition got you into trading -- great. Now if you want to keep trading, then you must learn to temper ambition with discipline.

It might help the ambitious to consider what a friend once told me: "You'll get more done in six days than in seven." Meaning: Sometimes the most productive thing we can do is nothing.

"Nothing" as in: Don't force trades.
"Nothing" as in: Leave your position alone once you're finally in that trade you wanted all along.

Just as a farmer will fail if he doesn't know in which season to plant his crops and in which season to harvest, a trader will fail if he doesn't know when to take action and when to sit still.

Aim to learn the differences that define which moments are which -- and then, more importantly, act (or do nothing) based on that knowledge. In the end, that is what separates the long-term successful traders from the shooting stars (who grow their accounts rapidly and then flame out just as quickly).

Many traders ultimately consume themselves under the compulsions of their own raw ambition. There is no lasting success without discipline.

Okay, enough Zen talk! Let's get to the charts.

Let's start off with NYA, since we owe NYA a debt of gratitude for fattening our accounts by telegraphing this turn well in advance:

COMPQ, which has yet to make a new low -- but which also allowed not one, but two great low-risk entries, so it's hard to complain. Bears should be careful here:

The two-minute SPX chart tells us that it's likely there will be at least one fourth and fifth wave unwind before any meaningful bottom. SPX is still trading within the waterfall channel, and a breakout there is the first step for bulls to begin to have a chance. But, generally speaking, the first breakout from a crash channel is simply a deceleration of the trend, as opposed to a full reversal.

Don't pay too much attention to where the (3) and (4) fall on this chart. There are no particularly reliable targets at this exact moment, and all my "official" targets were already reached.

Finally, the question everyone's asking now is, "Where are we in the big picture?" Well, that's an issue of some debate, as we'll see in a moment. Let's take a look at the obvious answer first, via SPX:

INDU disagrees. But there may still be an answer for INDU that brings the blue count in SPX and INDU into agreement -- we'll call it the Rodney King, "Can't we all just get along?" count. I didn't have time to label that count, but I noted it in the annotations:

Incidentally, you've probably noticed a lot of charts contain after-hours annotations from the forums. If you would like to become a member of our private forums, and you have donated recently, then please go to the forum link (here) and create an account. After you've done that, then send an email to the same email address that the donations go to, which includes your member name and the email address you registered at the forum. That will grant you access to the forum (please allow up to 48 hours). It's an exceptional group of folks with great market insight, charts, and humor. The atmosphere there is casual and fun, but respectful and collegial at the same time (unlike many forums around the web).

In conclusion, there are no signs of a significant bottom as of this exact moment. And at this point, the standard targets have been exceeded, so things will need to be watched on a session-by-session basis. At present, I do still believe this is a C-wave decline that will ultimately resolve with new highs, but I also think the market will give us some decent signals to let us know when the decline is over.

The approach to this market should be different for someone who's looking to protect profits on shorts vs. someone who's looking to go long for new highs. Regarding opening longs in this market, the approach I'll take from here will probably miss the exact bottom by a few points -- but we don't have to anticipate every single move a week in advance to profit. There's a time to anticipate, and there's a time to let the market lead -- and for me, anyway, this currently qualifies as the latter. Trade safe.

Follow me on Twitter while I try to figure out exactly how to make practical use of Twitter: @PretzelLogic

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